Commercial Vehicle sales in China remained soft in November with a year-over-year decrease of 1.1%. 11 month YTD sales were -9.7%. The outlook for truck demand is dependent on a recovery in spending on Infrastructure and Real Estate Development. The outlook for bus demand is mildly favorable due to rising urbanization. The only real bright spot is production of “New Energy” vehicles which currently benefit from heavy government subsidies.

The US listed auto suppliers have varying exposure to these segments:

CXDC: China XD Plastics makes modified plastic compounds used in “exteriors (automobile bumpers, rearview and sideview mirrors, license plate parts), interiors (door panels, dashboard, steering wheel, glove compartment and safety belt components), and functional components (air conditioner casing, heating and ventilation casing, engine covers, and air ducts)”. Plastic compounds are tailored to satisfy customer requirements for flexibility/rigidity, strength, and resistance to heat/cold and corrosion. In many applications plastic parts can replace metal components at lower cost and lighter weight. Penetration of larger commercial vehicles is limited due to greater strength requirements. The company has a long-term goal of expanding sales to railways, aircraft, medical devices, and 3-D printing. Rising demand for Electric/Hybrid vehicles is favorable for CXDC as these use more plastic parts than traditional models.

ZX: China Zenix Auto is the country’s leading producer of commercial vehicle wheel rims. The company made a considerable investment in a new facility capable of producing forged aluminum wheels. Alcoa estimates that such wheels will eventually capture 50% of the international market due to their lower maintenance cost and the fuel savings created by their lower weight. Zenix aluminum wheel output may benefit from rising “new energy bus” sales by Zhengzhou Yutong and others. Zenix disclosed during its 3Q conference call that the aluminum wheel facility has achieved a production capacity of 180000 wheels/year and the company gave guidance for 2016 sales of 100000 wheels. This is a major corporate milestone that should lead to improved operating results in 2016. Diesel exhaust from commercial vehicles is one of the largest factors in China’s current smog problem. Zenix believes the government will soon announce a new incentive program for replacement of older dirty vehicles and this will spur new wheel demand.

CAAS: China Automotive Systems is the country’s leading producer of steering systems. Most of the company’s operating subsidiaries were developed as joint ventures with major auto companies ensuring close corporate relationships. the company also has a strong supplier relationship with Chrysler North America.

CYD: China Yuchai International is a leading domestic producer of diesel engines (primarily for commercial vehicles) and has an emerging product line of natural gas-powered engines. The company deserves credit for the high quality of its investor communications and its consistently high dividend payouts.

CXDC and CAAS are the main beneficiaries of the renewed strength in the passenger market while ZX SORL and CYD are reliant on the weaker commercial vehicle market. CXDC and ZX are indirect beneficiaries of government incentives for “New Energy” electric vehicles.